In Ace American Ins. Co. v. Fireman’s Fund Ins. Co. (2016) 2016 Cal.App. LEXIS 647 (Aug. 5, 2016), the California Court of Appeal, Second Appellate District, Division Four, reversed the trial court which had sustained a primary insurer’s demurrer to a lawsuit brought an excess insurer. The excess insurer, Ace American Insurance Company (“Ace”), asserted causes of action against the primary insurer, Fireman’s Fund Insurance Company (“Fireman’s Fund”), for equitable subrogation and breach of the duty of good faith and fair dealing based on the primary insurer’s alleged unreasonable failure to settle an underlying action within primary policy limits. The Court of Appeal held that an excess insurer could maintain claims against a primary insurer even in the absence of a litigated judgment in the underlying action against their mutual insured.

The appellate court held that Ace’s lawsuit against Fireman’s Fund could have been brought by the insured or its assignee “despite the absence of a litigated excess judgment.” The court held that “an excess insurer which has settled and discharged the insured’s liability may recover from the primary insurer an amount in excess of the primary insurer’s policy limits if the excess insurer can prove the primary insurer’s unreasonable refusal to settle within its policy limits resulted in loss to the excess insurer in an amount in excess of the policy limits of the primary insurer it would not otherwise have had.” The court further held that an “excess judgment is not a required element of a cause of action for equitable subrogation or breach of the duty of good faith and fair dealing; where the insured or excess insurer has actually contributed to an excess settlement, the plaintiff may allege that the primary insurer’s breach of the duty to accept reasonable settlement offers resulted in damages in the form of the excess settlement.”

The Court of Appeal also rejected Fireman’s Fund public policy argument that “[p]rimary insurers would be hesitant to participate with excess insurers in settlements, for fear of the excess insurers turning around and suing them.” The court reasoned that primary insurers already have the duty to accept reasonable settlement offers within policy limits and are liable for resulting damages in the event of a breach of that duty.